Cap-and-trade puttering along quite nicely in the Northeast U.S.

Last week, I argued that people shouldn’t be so gloomy about carbon-trading systems, despite the hue and cry around the European Union’s Emissions Trading System (ETS) right now. One example of a carbon-trading system that seems to be doing just fine is the Regional Greenhouse Gas Initiative (RGGI), which currently involves nine states in the U.S. Northeast.

RGGI is pretty modest as these things go. It only covers power plants, and only those 25 megawatts or greater. (There are 211 covered plants at the moment.) Its first three-year trading period ended at the end of 2011.

Thus far, it seems to be working as planned — better than planned, actually. Over the 2008-11 period, CO2 emissions from covered plants were down 23 percent compared to the three years prior. That’s 126 million short tons of emissions eliminated.

In fact, over 2008-11, RGGI power plants came in 33 percent under the cap set by the program. (In 2012, they came in at 45 percent below the cap.)

So RGGI power plants are reducing emissions faster than expected, mostly due to cheap natural gas (and somewhat due to the recession as well). Meanwhile, over the same three years, RGGI state economies grew by over 8 percent and electricity prices fell by 20 percent.

Since RGGI began, according to an independent analysis from the, um, Analysis Group, polluters have spent about $912 million buying pollution permits. (Note: The permits are auctioned, thus raising revenue for states. One of the ETS’s great initial flaws is that it gave too many permits away for free.) Almost all of that $912 million has been funneled back into the economy through spending “on energy efficiency measures, community-based renewable power projects, assistance to low-income customers to help pay their electricity bills, education and job training programs, and even contributions to a state’s general fund.”

When the benefits of those investments are weighed against the costs of program compliance, what’s the net economic effect? That’s what the Analysis Group set out to determine. Its headline finding: “RGGI produced $1.6 billion in net present value (NPV) economic value added to the ten-state region.” (There were 10 states during the three-year trial period; NJ bailed in 2012.)

Just to make sure this sinks in: The RGGI states benefited economically from reducing carbon emissions.

Most of the benefit comes from energy efficiency. Though carbon pricing raised bills slightly at first, the states spent the proceeds on energy-efficiency programs that have lowered bills over time — to the tune of a net $1.1 billion economic benefit over RGGI’s first three years, most of it going to industrial and commercial customers. (An energy-efficient state is a business-friendly state!)

Also, RGGI states rely almost entirely on fossil fuels for electricity, but produce virtually none. That means fuel costs drain money out of their states. Over three years, RGGI helped keep $765 million of that money at home, circulating in local communities. The program also led to more than 16,000 new “job years,” through a combination of temporary and permanent new jobs.

Anyway, the program is going well. But emissions are coming in under the cap, so permit prices have been low — a similar challenge to the one faced by the ETS. Unlike the ETS, however, RGGI seems to be reacting in a sensible way.

RGGI states recently got done with a comprehensive two-year review of the program, which yielded a set of recommendations [PDF] for improving it. Among those recommendations is the same one I had for the ETS: lower the cap! The review recommends reducing the cap for 2014 from 165 million short tons to 91 million — a 45 percent drop — and reducing it 2.5 percent each subsequent year, out through 2020. That would mean, cumulatively through 2020:

80 to 90 million tons of additional CO2 reduction, which would leave the power sector’s CO2 emissions 45 percent below 2005 levels, well beyond Kyoto targets;

some $2.2 billion in additional revenue for states;

$8.2 billion in additional state GDP and almost 125,000 additional job years.

Not bad. The other recommendations are good too, including a reserve of allowances to be released if prices get too high, updates to the offsets program, and not selling those unsold permits from 2012 and 2013. (Check out the link above for more.)

Anyway. In the big picture, in absolute terms, RGGI isn’t doing that much for emissions. Right now, its main benefit is that it’s providing a much-needed source of revenue to state governments; the spending of that revenue, not the carbon price itself, is what’s driving most of the positive results.

But then, this is how it’s supposed to work. You start with a small, modest carbon-pricing program. It doesn’t destroy the economy. So you strengthen it, tighten the cap, maybe extend the program to other sectors. It still doesn’t destroy the economy. Wash, rinse, repeat. It’s a painfully slow and frustrating process, but unlike most other grand carbon schemes, it’s actually happening.